What Is a Full-Cost Method?

Full cost method is also known as full cost method, inductive cost method or absorptive cost method. Full cost method refers to the direct material, direct All costs of labor, variable manufacturing costs, and fixed manufacturing costs are summed up in product costs and inventory costs. Because the full cost method absorbs all manufacturing costs, whether fixed or variable, into unit products, so This method is also called the inductive (or absorption) cost method. Under the full cost method, the unit product cost is directly affected by the output. The larger the output, the lower the unit product cost, which can stimulate enterprises to increase their production enthusiasm. But the law is not conducive to cost management and short-term decision-making of enterprises.

Full cost method

The reason for using the full cost method is that although fixed manufacturing costs are only the same

(I) Different theoretical basis

The theoretical basis of the variable cost method: fixed manufacturing expenses are associated with a specific accounting period, are proportional to the length of the continuous operation period of the company's production and operation activities, and disappear with time. Its benefits should not be deferred to the next accounting period, but should be fully included in the income statement in the period in which it occurs, as a deduction for sales income in that period.

The traditional full cost law emphasizes the consistency of cost compensation. The theoretical basis is that fixed manufacturing costs occur in the production field and are directly related to product production.

Not good for cost management

Because the full cost method counts fixed manufacturing expenses into product costs, it brings problems to cost management:

First, the allocation of fixed manufacturing costs increases the cost of calculation work, affecting

In the full cost method, fixed manufacturing costs are used as product costs, and in the variable cost method, fixed manufacturing costs are used as period costs. ^[1]